“Private Capital Is Running Away From Trouble”

By Keith Dicker of IceCap Asset Management

Question: Why is the world in an economic funk?Answer: Private Capital is running away from trouble

Chart 2 shows two variables. The BLUE line shows the amount of quantitative easing or money printing in the USA. Up until September 2008, the amount of money made available to the economy increased in a gradual manner. Thereafter it became a gong show.

The RED line shows the Velocity of Money. Velocity of money is just another way to measure how well the economy is doing. And, while they are loathe to admit it, it is one of THE most important data points monitored by central banks every minute of the day.

Velocity of money measures how fast money swishes around an economy. The faster it swishes around, the faster the economy is growing. Naturally, the opposite is also true and this is what is happening today.

“Why is the world in an economic funk?” is the wrong question. Instead, the correct question to ask is “why is the velocity of money declining?” And more importantly, “Why, despite the printing of trillions of Dollars, Yen, Sterling and Euros, is the Velocity of Money declining?” The answer of course is quite simple: Private Capital does not like the actions by central banks and governments, and is therefore withdrawing their money from the global economy. And it is heading towards the center of the earth. Yes, it really is as simple as that. Yet, the irony is that our central banks and governments have no clue as to the risks they have created.

They honestly believe their efforts to stimulate the economy is groovy. But since their stimulus isn’t working – the answer is to do more of the same.

Maybe we should make them all memorize Einstein’s quote “Insanity: doing the same thing over and over again and expecting different results.”

Yes, the insanity continues. And judging by recent actions, it will continue for a while longer, until that is, the bond market makes them stop.

Fortunately, we are getting closer to a resolution. And when (not if) it happens, it will be spectacular.

The question of course is “will you see it coming”?

* * *

By our estimate, today’s market is equivalent to late 2006 or early 2007. We could be off by as many as 12-15 months, and until it happens most investors, advisors and managers will continue to sing along, whistling happy-go-lucky tunes.

We wish them luck.

Meanwhile, if you find it difficult understanding the banking and insurance industry don’t feel bad, after all they do play by different accounting rules than every other company.

Instead, simply follow interest rates around the world. The closer long-term rates get to ZERO%, and the increase in government bonds trading at NEGATIVE interest rates, the closer we are experiencing a fairly big shift in financial markets.

To understand why we expect the bond bubble to end sooner versus later, grab a drink and stare at Chart 3 on this page.

Currently, over $5.5 TRILLION of bonds pay investors a NEGATIVE INTEREST RATE. In other words, investors are PAYING governments for the privilege of lending them money.

If you don’t understand interest rates, just accept that interest rates should always be a POSITIVE #. Otherwise, it just doesn’t make sense, it’s illogical. it’s ridiculous. It’s absurd. Yet, this is the journey created by our central banks and governments all in the name of making the world a better place.

From a different perspective – these negative interest rates should be viewed as your best financial gift ever.

Understanding why this is happening, tracking the absurdity behind it all and monitoring global interest rates will provide you the little nudge needed to know when the bubble will break. We’re not there yet. But, we’re getting a lot closer.

No market acts in isolation. Stocks, bonds, currencies, gold, Super Bowl tickets – they are all influenced by each other.

When the bond market reaches its zenith, it will likely be getting little fan fare – instead, other asset classes such as stocks and currencies will still be getting all of the attention (again – sorry Bonfire of the Vanities).

We anticipate significant capital running away from perceived dangers, and towards the bond market for safety.

And once this capital is resting comfortably, that dreaded “oops” feeling suddenly appears, making investors’ faces turn white – the bond market was the biggest trouble after all.

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Oliver Wright is an international lawyer, financier, and published author. He is the Founder and CEO of Vanquish Merchant Bank. His writings appear in journals such as the Harvard Journal of International Press-Politics. For six years Oliver was an international litigator and corporate attorney practicing cross-border mergers and acquisitions at Gibson, Dunn & Crutcher, the top ranked litigation firm in the country. Oliver Wright holds dual Master and Doctor of Law degrees in International and Comparative Law from Cornell Law School, where he graduated with honors and was Editor of the Cornell Law Review. He was class major valedictorian at UCLA, where he graduated summa cum laude, phi beta kappa with a BA in Communications Studies.